How is the inventory turnover ratio calculated?



Q21. Inventory turnover ratio
How is the inventory turnover ratio calculated?

A21.
Inventory turnover ratio
= Cost of goods sold / Average inventory

[Entity 21-a]
Cost of goods sold = $5,290,000
Beginning inventory = $450,000
Ending inventory = $470,000
Average inventory
= ($450,000 + $470,000) / 2
= $460,000
Inventory turnover ratio
= $5,290,000 / $460,000 = 11.5

[Entity 21-b]
Cost of goods sold = $5,508,000
Beginning inventory = $520,000
Ending inventory = $560,000
Average inventory
= ($520,000 + $560,000) / 2
= $540,000
Inventory turnover ratio
= $5,508,000 / $540,000 = 10.2

[Note]
Higher inventory turnover ratio –> more active.
Thus in this example, Entity 21-a is more active in inventory turnover than Entity 21-b.

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